How To Prepare For High Health Care Costs

Zoe Team

Mar 22, 2023

10 min read

A financial advisor reviewing a plan with two clients at a table

Key Takeaways

Aging requires proactive financial preparation for health care.
Even healthy, active individuals need to plan for potential costs.
Start preparing early to manage future medical expenses effectively.

Frequently Asked Questions

Why is health care cost planning important?

As you age, health care needs often increase, making it essential to prepare for potential costs regardless of current health status.

Is being healthy enough to avoid future costs?

Even with healthy lifestyle choices, unexpected life events and aging can lead to high health care costs that require financial planning.

How should one start preparing for these costs?

Preparation involves early financial planning, understanding your health care options, and setting aside funds to manage future medical expenses.

But, let’s face it, this is not a young band. Each of the four remaining members are over age 70, and according to this reliable source, the combined age of the group is 294! And while the band members claim to live much quieter, healthy lives nowadays, it wasn’t always like this. Google ‘the Rolling Stones’ and you’ll learn about the dramatic and heady days of the 60’s and 70’s (and 80’s and 90’s) when alcohol, heroin, cocaine and groupies were a constant presence during the band’s tours. Nowadays, besides the recent birth of Mick Jagger’s eighth child with his 31 year old girlfriend, the band members have mainly settled down, trading in the Jameson shots for health shakes and fast living for long afternoon walks in the country.

Like the Rolling Stones, most people in retirement strive to stay healthy and keep health care needs to a minimum. As I mentioned in a past post, health care can start out at a reasonable cost once you enter retirement, but health care expenses are the fastest growing costs in retirement so you may see your costs more than triple by the time you reach age 85.

Mick Jagger is having a great retirement; 3 ways that you can too

So how to prepare for higher health care costs in retirement? Here are three ways to ensure that while you can’t always get what you want, you’ll get what you need (see what I did there?):

1. Create a health care savings plan

According to a recent EBRI study, about 6 in 10 Americans feel confident that they can live comfortably in retirement and less than 20% of Americans feel very confident. Less than half of Americans feel somewhat confident that they have adequately prepared for retirement. Overwhelmingly, the study found that people who had established a retirement plan felt more confident that they were saving enough for retirement and that they would live more comfortably in retirement.

Working with a fiduciary advisor can help you to develop a solid retirement plan. It’s important to have the important conversations—even the painful ones-- with your advisor, just like you would with a doctor. What are the sources of retirement income? How much have you saved thus far? What are your expectations for retirement? This information can help your advisor develop a plan that aligns with your realistic expectations, encourage better saving, spending and investing habits and help you stay in better control of your future.

2. Max out employer plan or other tax-deferred savings

This is an easy one. If you have access to an employer plan like a 401(k), make sure that you are maxing out your annual contributions. Remember that any contributions you make into these plans are pre-tax and grow tax-deferred. This means that any growth in your employer plan is not taxable to you until you take a distribution from the plan. Once you take a distribution, the entire amount is subject to ordinary income tax.

The annual contribution limit for most employer plans for 2018 is $18,500 and if you are age 50 and over, you can make an additional $6000 pretax contribution up to $24,500. For 2019, the annual contribution limits are $19,000/25,000. Another reason to make contributions to your plan is that many employers will match your contribution up to a certain dollar amount or percentage. Many employers with match 50 cents on the dollar up to a certain limit, so if you can’t max out your contribution, at least contribute enough to get the company match.

What if you don’t have access to an employer plan? You may consider opening an Individual Retirement Account (IRA). An IRA allows you to make annual contributions (in 2018, up to $5500 in /$6500 if age 50 and over), and the account grows tax-deferred until you start taking distributions in retirement. Once you take money out of your account, some or all of your distribution will be subject to ordinary income tax. Some IRAs allow all or part of contributions to be tax-deductible depending on your income level. If your income is higher than the limit, your contribution is not deductible (it is an after-tax contribution) and later your distribution will be partially taxed. Find out more about Traditional or Roth IRAs, which are accounts funded with after-tax money and provide qualified tax-free distributions.

3. Max out your HSA

If you have access to a Health Saving Account (HSA), max that out as well. This account is a triple tax threat—you make a pretax contribution (up to the annual limit which is $3450 single/$6900 family and an additional $1000 for account holders age 50 and over in 2018), the money grows tax-deferred while in the account and if you use the money for qualifying health care expenses, that distribution is tax free.

Most employers that offer high deductible health care plans tend to offer HSAs as a way for employees to mitigate some of the high costs of healthcare, but not all do so it pays to check. Money withdrawn from an HSA may be used for most health care expenses with some exceptions including many out of pocket Medicare costs or premiums. HSA accounts can be used to defray many health care costs including paying for health care premiums while you’re in between jobs and other costs that Medicare does not provide like vision, dental and hearing.

Another advantage is that money not used in the account rolls over from year to year so it’s not a ‘use it or lose it’ account. Note that if you use HSA funds to pay for non-health care services and costs, you will have to pay tax on the withdrawal along with an extra 20% penalty if you are under age 65.

Thinking about retirement uncertainties like rising health care costs may make you scream “Gimme shelter!,” but taking advantage of the things you can control—like working with an advisor and establishing a plan, maxing out your employer-sponsored plan and making contributions to your HSA—can provide better retirement outcomes, peace of mind and “satisfaction.”

So guess what? The Rolling Stones—the infamous UK band from the 1960’s—is going on tour in 2019. I was pretty shocked to hear this but it is certainly a testament to the power of their music and on- and off-stage personalities that they continue to draw multi-generational crowds decades after the peak of their popularity.

Mick Jagger is having a great retirement; 3 ways that you can too

So how to prepare for higher health care costs in retirement? Here are three ways to ensure that while you can’t always get what you want, you’ll get what you need (see what I did there?):

1. Create a health care savings plan

2. Max out employer plan or other tax-deferred savings

3. Max out your HSA

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